Soaring US gas prices give coal a boost

CONVENTIONAL wisdom over the past few years has been that ongoing growth in US electricity demand would be provided initially by utilising spare coal-fired generating capacity and then by construction of a new generation of low capital cost gas-fired power stations.

Staff Reporter

While the first part of this equation has come to pass, soaring gas prices above US$8 per million British thermal units have prompted utilities to show renewed interest in constructing new coal-fired plants. Even if gas prices track downwards again, after the peak demand period of the northern winter, the current price surge will have reinforced utility concerns about the volatility of gas prices and the future capacity of the gas sector to supply a raft of new gas-fired power plants.

The turnaround in perceptions of the long term future of coal has been reflected in sharply higher share prices of major listed US coal companies.

Gas is still expected to take the lion's share of new generating capacity over the next 10 years but the limitations on gas supply that are already impacting on prices will cap increases in new gas fired generating capacity over the short term.

US gas production has stagnated over the past six years, and future gas discoveries may struggle to match rates of exhaustion of existing reservoirs. The US is reliant on imports of Canadian gas to cover the shortfall –imports by pipeline from Canada were 94.70 billion cubic metres in 1999. Gas supplies will be augmented if plans for a gas pipeline to Alaska come to fruition, but such a pipeline could not be commissioned until later this decade.

Gas consumption tailed off in 1998 and 1999, primarily as a result of milder than usual winters. Consumption is forecast to grow 3% to 638 million cubic metres this year assuming more normal (colder) weather patterns for the remainder of the year. Most new homes are in the US are now heated by natural gas and substantial new gas-fired generating capacity has already come on stream. US production of natural gas on the other hand is expected to grow by under 1%.

Over 90% of planned new power plants in the US are gas-fired. But, in September, Wisconsin Energy Corp announced plans to build two 600MW coal plants, the first such proposal in the US in five years.

Wisconsin Energy plans to commence construction of the plant in early 2002 if regulatory approvals proceed to schedule. It has yet to decide if the new plants will be conventional plants or higher efficiency (and higher capital cost) coal gasification combined cycle units.

One note of caution for coal-fired electricity sector is sounded, however, by the moves by Federal regulators to impose restrictions on mercury emissions from power plants. Coal-fired power plants are the largest source of manmade mercury emissions in the US.

Decisions on new generating capacity will need to taken soon, with spare generating capacity having been largely mopped up by increasing electricity demand. Low rainfall over hydroelectric catchment areas has contributed to critical power shortages in California and the north-west and boosted demand for coal.

The decision on which fuel to adopt is largely restricted to either gas or coal. The availability of sites suitable for new hydroelectric dams is extremely limited. Other renewable energy sources such as wind or solar cannot be developed rapidly enough to have a significant impact over the medium term and suffer from extremely high costs and from the intermittent nature of their electricity generation.

The oil option has long been discarded owing to high prices and price volatility, and renewed interest in the construction of nuclear plants in the US is unlikely because of high costs and environmental concerns. Existing nuclear plants have substantially boosted output over the past year or two but to a degree this has come at the expense of deferred routine maintenance. Maintenance outages at nuclear plants are now on the increase – contributing to tight energy markets.

A strong US steam coal market of course tends to also strengthen international coal markets, with the level of US exports strongly influenced by the levels of domestic versus international steam coal prices. Furthermore, the impact of high oil, gas and LNG prices is not restricted to the US, with this theme also being played out in the major coal importing countries.

High gas prices are also providing a small boost to coking coal demand. Producers of direct reduced iron (DRI), who predominantly use gas as an energy source, are finding it difficult to compete with scrap and pig iron at current gas prices. DRI production has been suspended at Corus’ plant in Alabama, American Iron Reduction’s plant in Louisiana, and the HYL plant in Mexico. Ispat is also considering halting DRI production at its Canadian and Mexican operations.

By Clyde Henderson, Energy Economics

Republished with permission